Habib Bank Limited. HBL: Giant Getting Ginormous. 1 WE Detailed Report

Transcription

1 1 Habib Bank Limited HBL: Giant Getting Ginormous KEY DATA KATS Code HBL Reuters Code HBL.KA Current Price (PkR) Year High, Low (Rs) , Market Cap (Rs bn) 277 Market Cap (US$ bn) 2.74 Shares Outstanding (mn) Free Float (%) 10% Source: KSE, Reuters & WE Research Index 34,000 31,000 28,000 25,000 Jan-14 Feb-14 Price Relative to KSE 100 Index Mar-14 Apr-14 May-14 Jun-14 Jul-14 KSE 100 INDEX Aug-14 Sep-14 Source: KSE & WE Research Oct-14 Nov-14 HBL Dec-14 Jan-15 Rs Mar We endure our liking for Habib Bank Limited with a 'BUY' recommendation for Dec'15 target price of Rs 227/share offering an upside potential of around 25% from current price of Rs /share with an EPS of Rs In addition to capital gain, the company is also offering a dividend yield of 6.9% taking the cumulative return to 32%. The bank is likely to offer average ROE of 19% for the next 3 years (CY15-17). HBL, at the current price of Rs181.32/share, is being traded at PBV of 1.6x and PER of 7.9x based on CY15E book value of Rs 118.6/share and EPS of Rs The basis of our recommendation stems from: 1) strong earning growth resulting in a 10% YoY growth during CY15; 2) Increment in average deposit growth up to 6.6% in CY15-17; 3) lower cost of deposit resulting in better spread; 4) growth in investment by 12.9% during CY14 and expected to continue; 5) Bank is expected to gain net interest Income of Rs75.76 billion in CY15 which reflects growth of 12% YoY and 5) reduction in non-performing loans. In addition to that, major risks to our analysis are: 1) political chaos, 2) law & order issues to affect business climate; 3) further decline in interest rates; 4) slowdown in loan growth; and 5) lower capital gains due to under performance of market. HBL Financial Snapshot CY14A CY15F CY16F CY17F Profit after Tax (Rs mn) 31,112 34,384 36,195 37,520 EPS (Rs) Book Value (Rs/share) DPS (Rs) P/E (x) P/BV(x) Dividend Yield (%) Payout (%) ROE (%) ROA (%)

2 2 Valuation: BUY with a Target Price of Rs 227 A combination of valuation methodologies have been used i.e. DDDM (Distributable Dividend Discount Model) and Justified Book Value Method to calculate target price of HBL. Our Dec'15 target price for HBL is Rs 227/share, offering an upside of 25% against current market price of Rs / share with an EPS of Rs Further support can be achieved through potential dividend yield of 6.9%. Hence we recommend BUY for it. Distributable Dividend Discount Model Under the DDDM Model, the total value of the Bank is found by estimating the present value of distributable earnings under a target CAR ratio. Our calculations incorporate a target CAR of 18%, a discount rate of 15.3%, a terminal growth rate of 9%, implying a target price of Dec'15 of Rs 234/share for HBL. Our Dec'15 target price for HBL is Rs 227/share, offering an upside of 22% against current market price of Rs /share with an EPS of Rs Further support can be achieved through potential dividend yield of 6.9%. Hence we recommend BUY for it. Rs in million CY15E CY16F CY17F Risk Assets 1,606,547 1,679,708 1,756,528 Increase in RWA 92,728 73,161 76,819 CAR + 2.0% 18% 18% 18% Additional capital required 15,949 12,584 13,213 Net profit 31,847 33,873 35,294 Available for dividends 15,898 21,289 22,081 PV of cash flows 15,898 18,684 17,007 Terminal Value 378,510 Discounted Terminal Value 291,544 Equity Value 343,134 Shares Outstanding 1,467 DDDM Target Price Dec 15 (Rs) 234 Source: WE Estimates Justified PBV (Price to Book Value) For Justified Price to Book Value method, a growth rate (g) of 9% based on the assumption that HBL has sustainable ROE of 19.7% and retention ratio of 45.5% at the terminal. The required rate of return of equity is 15.33% based on risk free rate of 10% derived from secondary market rate of 10yr PIB as a proxy and beta of 0.89 and risk premium of 6%, Thus, Justified PBV ratio for HBL stands at 1.7x and multiplying it with its CY16E book value of Rs /share, the target price of HBL comes to Rs 220/ share. Average Target Price Rs 227/Share

3 3 The bank is expected to post a profit after taxation (PAT) of Rs 34,384 million (EPS: Rs 23.4) in CY15 resulting in a 10.5% YoY growth when compared to a PAT of Rs 31,112 million (EPS: Rs 21.21) in CY14. The rise in bottom-line would be on back of surge in net interest income and hike in nonfunded income, and relatively stagnant provisions. Bank's deposit grew at an average rate of 16.7% (CY09-CY14) and expected to grow on average rate of 6.6% (CY15-CY17E) reaching Rs 1,678 billion on the back of growing branch network and higher current account deposits. The CASA ratio of the bank has improved significantly from 75% as of CY13 to 79.5% as of CY14. Strong Earning growth ahead in CY15 The bank is expected to post a profit after taxation (PAT) of Rs 34,384 million (EPS: Rs 23.4) in CY15 resulting in a 10.5% YoY growth when compared to a PAT of Rs 31,112 million (EPS: Rs 21.21) in CY14. The rise in bottom line would be on back of surge in net interest income and hike in non-funded income, and relatively stagnant provisions. We expect company to announce cash dividend of Rs Rs in million Profit after Taxation ROE 12.75/share. The bottom line of the compa- 40,000 20% ny is expected to fatten in the coming years where it is likely to grow by an average of 7% YoY during (CY15- CY17E) while the ROE 35,000 30,000 25,000 20,000 19% 18% 17% 16% of the bank to average CY13A CY14E CY15F CY16F CY17F 18.9% during (CY15- Source: WE Research CY17E). Deposits continue to nurture HBL has maintained its leadership position with market share of deposits stable at around 9.9%. It has been constantly expanding its branches with total of 1614 branches as of Dec'14 with deposit base of Rs 1,570 billion. Bank's deposit grew at an average rate of 16.7% (CY09-CY14) and expected to grow on average rate of 6.6% (CY15-CY17E) reaching Rs 1,678 billion on the back of growing branch network and higher current account deposits. The CASA ratio of the bank has improved significantly from 75% as of CY13 to 79.5% as of CY14. Consequently bank's cost of funds has declined to 4.3% in CY14 versus 4.4% in CY13. We expect further decline to 3.9% in CY15. In CY14 the bank had 34% deposits in current Rs in billion account, 46% in saving Deposits Cost of Deposits % account and 20% in fixed deposits. Our % 5.1% expectations for CY are 39% in current 4.9% 500 account, 44% in saving 4.7% 400 account and 16% in 4.5% fixed deposits % CY11A CY12A CY13A CY14E CY15F CY16F Source: WE Research

4 4 We expect the advances of the bank to grow at an average of 6.6% YoY in CY15-CY17E. The advances to deposits ratio of the bank would reduce to 41.03% in CY15 versus 42.58% in CY14 accredited to conservative lending approach.subsequently this led to slight decline in bank's income yields from 8.8% in CY14 to 8.3% in CY15. The net interest income of the bank is expected to total Rs 75,841 million which reflects growth of 12% for CY15. In CY14 HBL's balance sheet continued to grow Rs 1,769 billion with the deposit base to Rs 1,447 billion. Besides decreasing high cost deposits, the bank increased its domestic deposits to Rs 1.26 trillion. We have assumed 50bps decline in discount rate in May'15 monetary policy. Advances seeing stability On the back of improving economic conditions, reducing nonperforming loans, and increasing deposits we expect the advances of the bank to grow at an average of 6.6% YoY in CY15- CY17E. The advances to deposits ratio of the bank would reduce to 41.03% in CY15 versus 42.58% in CY14 accredited to conservative lending approach. Subsequently this led to slight decline in bank's income yields from 8.8% in CY14 to 8.3% in CY15. Although the shifting from credit business has hurt bank's yield, but simultaneously the bank managed to strengthen up and improved its asset quality. Firstly, by reducing credit exposure HBL managed to restrict its non-performing loans (NPL) accretion - NPL grew by a meager 9.9% against gross advances in CY14 as compared to 10.5% in CY13. And, secondly it provided enough room to take up a position in lucrative sovereign yields, which helped in keeping bank's Capital Adequacy Ratio (CAR) relatively high. The CAR under Basel III improved from 15.4% to 16.2% as at December 31, 2014, while the Tier 1 CAR improved to 13.3% as a result of strong internal capital generation. Net interest income on the move We are expecting net interest income to rise due to HBL's strategic focus to build Current Accounts from its core business. In CY14, HBL had deposits of 34.2% in terms of current account, 43.9% as saving account, 21.9% as fixed deposit account. The net interest income of the bank is expected to total Rs 75,841 million which reflects growth of 12% for CY15. In CY14 HBL's balance sheet continued to grow Rs 1,769 billion with the deposit base to Rs 1,447 billion. Besides decreasing high cost deposits, the bank increased its domestic deposits to Rs 1.26 trillion. We have assumed 50bps decline in discount rate in May'15 monetary policy. Non funded income grooming Being the largest private bank, HBL enjoys large pool of investment in diversified businesses. Its continued focus to enhance its Non-Interest Income (NII) has started to produce positive results. On average NII of the bank likely to get a good support by a moderate rise in non-interest income which is expected to total Rs 19,971 million in CY15 against Rs. 19,675 million in CY14, depicting rise by 2%; reflecting bank's adoptive strategy to stream up revenues through alternative distributions channels.

5 5 Investments have always been important earning assets to the banks. HBL is keenly focusing towards investment that is witnessed in CY14 where the investment growth increased by 12.9% in CY14 from 2.3% in CY13. The bank was holding PIBs worth Rs 304 billion, Treasury bills worth Rs 450 billion, and other investments worth Rs 143 billion during CY14. The Cabinet Committee on Privatization (CCOP) has approved a transaction structure under which it will sell million shares of the HBL. These shares are divided into two categories: 250 million shares will be sold as base shares through the book-building process; whereas the remaining million shares will be available under a Green Shoe Option to be exercised on the basis of investor demand. Investments remained Focus Investments have always been important earning assets to the banks. HBL is keenly focusing towards investment that is witnessed in CY14 where the investment growth increased by 12.9% in CY14 from 2.3% in CY13. The bank was holding PIBs worth Rs 304 billion, Treasury bills worth Rs 450 billion, and other investments worth Rs 143 billion during CY14. Among these, Rs 223 billion worth of PIBs were secured for available for sale, Rs 76 billion worth were hold till maturity, and Rs 5 billion were held for trading. Treasury bills worth Rs 407 billion were available for sale whereas Rs 42 billion T-Bills were hold for trading. We are expecting the same aggressiveness to continue with the investment of 1 trillion in CY15. Investment to deposit ratio considered is 60.8% for CY15. HBL is currently trading at a CY15E Price to Book value of 1.6x, Price to Earning ratio of 7.9x and Dividend Yield of 6.31%. Within the backdrop of a rebounding economy, we remain bullish on the banking sector in general and the larger banks in particular which do not need to raise further capital in order to fund future growth. Further upside potential can be witnessed with an increase in free float as the Government of Pakistan looks to divest 41.5% of its stake over the upcoming months comprising of more than six hundred million shares. PKR mn 280, , , , , , ,000 Net Advances E 2015E Government to offload its shares Government of Pakistan, under privatization program, plans to offload its shareholding of more than six hundred million shares (41.5%) of HBL through a Capital Market transaction to foreign and Domestic investors. The Cabinet Committee on Privatization (CCOP) has approved a transaction structure under which it will sell million shares of the HBL. These shares are divided into two categories: 250 million shares will be sold as base shares through the book-building process; whereas the remaining million shares will be available under a Green Shoe Option to be exercised on the basis of investor demand.

6 6 Key Risks Political, law & order issues to affect business climate Targeted raids by rangers and police to arrest criminals linked with political parties creating uneasiness. Any clash in result would badly affect equity market. Slowdown in loan growth We expect the net advances of the bank to grow by around 6% in CY15 therefore lower rise in advances could reduce our CY15 estimates for the bank. Lower capital gains would restrict growth Stock market is poised for new targets in CY15 on back of P/E rerating, earnings growth, and positive foreign inflows. However market can turn bad on multiple triggers and huge correction can result in lower gains/provisions on HBL non funded income. Company Introduction Habib Bank Limited incorporated in Pakistan, is a scheduled Bank, engaged in commercial banking and related services. It is enjoying a very strong backing in terms of 51% shareholding by Aga Khan Fund for Economic Development (AKFED), followed by 41.5% by Government of Pakistan and the rest 7.5% among institutions and retail investors. The Bank is listed on all stock exchanges in Pakistan. The Bank operates a total of 2100 branches in Pakistan as well as 27 other countries. Currently it holds over 8 million customers worldwide. Over $ 3 billion of remittances were channeled through HBL and its partnering?nancial institutions network, primarily in Gulf, Saudi Arabia, UK and USA during CY14. Shareholding Structure 2.1% 4.9% 41.5% 51.5% Aga Khan Fund Local General Public GoP Others Source: Company Report

7 7 Key Ratio Analysis HBL - Financial Highlights CY14A CY15F CY16F CY17F EPS (Rs) DPS (Rs) Book Value (Rs/share) Dividend Yield Dividend Payout ROE (%) ROA (%) ADR (%) IDR (%) PAT Growth (%) 42.0% 10.5% 5.3% 3.7% NII Growth (%) 25.3% 12.5% 7.9% 5.9% Non int. exp. Growth (%) 16.9% 6.8% 6.8% 6.9% Deposits Growth (%) 9.9% 8.6% 6.8% 5.9% Net Advances Growth (%) 6.0% 5.0% 5.0% 5.0% Investments Growth (%) 12.9% 6.9% 4.3% 4.3% NPLs / Gross Advances (%) 9.9% 9.9% 9.9% 9.9% Income Statement Rs in million CY14A CY15F CY16F CY17F Interest Earned 135, , , ,341 Interest Expensed 68,498 65,330 67,801 68,721 Interest Income 67,430 75,841 81,819 86,620 Provisions 734 1,909 2,291 2,749 Interest Income after Provisions 66,696 73,932 79,528 83,871 Non Interest Income 19,675 19,971 20,401 21,157 Non Interest Expenses 39,496 42,198 45,088 48,180 Profit before Taxation 46,875 51,705 54,841 56,848 Taxation 15,762 17,321 18,646 19,328 Profit after Taxation 31,112 34,384 36,195 37,520

8 8 Balance Sheet Rs in million CY14A CY15F CY16F CY17F Cash & Bank balances 122, , , ,554 Balances with other banks 53,026 55,677 58,461 61,384 Lending to financial institutions 34,314 36,029 37,831 39,722 Investments 897, ,490 1,000,298 1,043,147 Advances 555, , , ,939 Operating Fixed Assets 24,874 26,118 27,424 28,795 Other assets 81,743 85,830 90,122 94,628 Total Assets 1,769,196 1,917,300 2,049,475 2,175,169 Bills Payable 21,956 23,053 24,206 25,416 Borrowings 99, , , ,335 Deposits 1,447,215 1,570,997 1,678,463 1,777,694 Deferred tax liabilities 1,850 1,943 2,040 2,142 Other liabilities 40,677 42,710 44,846 47,088 Total Liabilities 1,611,329 1,743,316 1,859,398 1,967,675 Share Capital 14,669 14,669 14,669 14,669 Reserves 40,705 43,817 46,930 50,042 Un-appropriated Profit 81,708 94, , ,996 Total Tier I Equity 137, , , ,707 Surplus on Revaluation of Assets 20,786 20,786 20,786 20,786 Total Shareholder Equity 157, , , ,493 WE Financial Services Corporate Office 506, Fifth Floor, Karachi Stock Exchange Building, Stock Exchange Road, Karachi , Pakistan URL: Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, we do not accept any responsibility for its accuracy & completeness and it is not intended to be an offer or a solicitation to buy or sell any securities. WE Financial Services & its employees will not be responsible for the consequence of reliance upon any opinion or statement herein or for any omission. All opinions and estimates contained herein constitute our judgment as of the date mentioned in the report and are subject to change without notice. For live markets, historical data, charts/graphs and investment/technical analysis tools, please visit our website URL: